Tesla CEO Elon Musk ties base Model 3 availability to company profitability

In a discussion on Twitter over the newly-announced dual motor and performance Model 3 options, Tesla CEO Elon Musk stated that the $35,000 base model of the Model 3 would not ship for “3 to 6 months” until after hitting their planned production goal of 5,000 cars per week, primarily to ensure that Tesla will be able to produce the car profitably.

Tesla plans to hit 5,000/week in July, which puts the base model’s earliest deliveries in the 4th quarter of this year, though possibly not until 2019.

While we have known for some time that the base Model 3 would be delivered well after the higher-spec early versions, Tesla’s configurator currently states that the standard battery version will be available in “Late ’18.”  However, this note from Musk pushes that timeline back to possibly “early ’19,” given that 6 months after July is already January of next year.

This is interesting considering Tesla’s recent reduction in expected delivery times for newly ordered cars.

With production, 1st you need achieve target rate & then smooth out flow to achieve target cost. Shipping min cost Model 3 right away wd cause Tesla to lose money & die. Need 3 to 6 months after 5k/wk to ship $35k Tesla & live.

— Elon Musk (@elonmusk) May 21, 2018

Musk also ties Model 3 margins to the survival of the company.  Given his recent projections that Tesla will be profitable later this year and Tesla’s desire not to raise more capital to fund Model 3 production, Model 3 needs to be profitable on its own in order achieve these goals.  Pushing higher optioned cars first allows Tesla a better chance at profitability with a new vehicle line while they focus on getting costs down so they can produce a base model profitably.

But the number one question on many owners’ minds will be the availability of tax credits.  An extra $7,500 goes a long way, but this is particularly true for the base model, as $7,500 is a significantly larger percentage of the purchase price of a base model car as opposed to the newly-announced $78,000 performance model.

Given that Tesla has already delivered quite a few cars in the US, it’s expected that they will hit 200,000 total vehicle deliveries sometime in the next few months.  When that milestone is hit, the full $7,500 credit is still available until the end of the second calendar quarter after that happens.

This means that if Tesla sells their 200,000th car on July 1st, the full credit is available until December 31st.  If they sell it on June 30th or earlier, the full credit is available until September 31st.

After that, the credit goes to $3,750 for 6 months, then $1,875 for 6 more months.  So even if the credit does “expire” prior to the delivery of the $35k base Model 3, there will be some relief available for buyers who don’t make the deadline, in addition to whatever state and local credits exist.

Electrek’s Take

The announcement of a $78,000 performance model of a car which has always had a claimed $35,000 base price drew some consternation among Tesla fans yesterday, some thinking that the base Model 3 may never be available.

I too am mildly afraid of this, as Tesla has had a situation like this happen before – after promising a $50k base price on the Model S 40 kWh version, Tesla continually pushed back production of that battery size and tried to convince as many reservation holders as possible to upgrade or cancel their reservations, then only sold a small number of 40 kWh cars to reservation holders who had reserved with that in mind before killing the option off.

I’m hoping that Tesla is not doing the same with the base Model 3.

After all, the margins on the performance model will likely be quite high. The cost of the performance option, over and above the other options we know are available, is nearly $20k, and surely Tesla’s cost is not that high, so they must be making a significant margin on that option.

If Tesla can sell a compelling car which is better than the competition in that price range (as I believe they can, since the Model 3 is excellent and they’ve managed the same feat with the Model S), they should, by all means, do it and reap whatever profits the market will bear.  Some consumers may be unhappy at this, but if a business has so much demand for higher-margin vehicles that they can’t even meet that demand, then it would be unwise for them to produce lower-margin cars and leave those profits on the table.

Tesla also needs high margins on loaded Model 3s, since Musk has said many times recently that the company intends to be profitable in the latter half of this year, and does not intend to raise more capital.

So the question is: will Tesla use the profitability of higher-optioned cars to allow them to sell a lower-margin base model car; or will they find the allure of high profits too appealing, and be able to sell enough cars at high option levels that they don’t actually need to sell a base model car, or that the base model car would represent an opportunity cost of not selling a higher-optioned car, as long as Tesla still doesn’t have enough production to meet the demand of this highly-anticipated vehicle?

Also, as we’ve mused before, will the late entry of the base Model 3 open the door for other similarly-priced EVs out there, like the Chevy Bolt EV and Nissan Leaf, both of which we at Electrek have driven and reviewed positively (even if we’re unhappy with those companies’ anti-EV lobbying activity).

Even though we’ve been through a similar situation before with the 40 kWh Model S, given that Tesla is much higher-profile now (and therefore so are its promises), and given that there are so many people waiting for the Model 3 still and many of them are there for the $35,000 base price (or close to it), I think there’s a better chance that Tesla will follow through than not.  But depending on how high demand is for the new performance model, who knows when that will happen.